View from London: US Dollar Breaks Out of Downtrend

Today isn’t about the rest of the world but the U.S. as earnings and tax reform hopes have combined with good economic data to drive up rates and leave the USD finally breaking out of its downtrend, writes Bob Savage, CEO of Track Research Friday from London.

Ongoing progress in U.S. tax reform in Congress mixes with the dovish tapering plans of the ECB to produce another day for equity rallies with higher rates, stronger USD following.

The essential hope for many traders today is that this is a jailbreak from low volatility and low yields to something more tradeable – trends, breakouts and momentum are the models that everyone hopes will work again.

The booming growth from Amazon (AMZ), Microsoft (MSFT) and Alphabet (GOOGL) adds to the risk-on mood. However, this party isn’t global.

Notable pain trade today for Australia where the Deputy PM Joyce is ineligible after a court ruling erasing the present government majority from 1 to none – and with iron ore off 4% in China – adding to the Australian dollar (AUD/USD) pain.

The Spanish saga of dealing with Catalan continues with Puigdemont ruling out elections and pushing for independence today ahead of Spain’s vote to take control. Can there be a Catalan Spring in the Autumn is now left for markets to decide. This leaves more pressure on the EUR and on the Spanish IBEX 35 (IBEX) off 1%.

For the UK, the Scottish Leader Sturgeon sends a letter to UK May demanding clarity on her Brexit plans. This leaves British pound (GBP/EUR) at the bottom of its recent ranges. The markets had light economic news – Japanese yen (JPY/USD) is weaker but not because CPI was out of expectations, rather because few see the BOJ able to hold its policy intact against sharply higher global rates from the U.S. and elsewhere.

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The China industrial profits were higher but the real story was in the MOF sale of dollar-denominated bonds – setting a curve for their SOE corporates to issue from and with a much tighter spread than most expected.

The biggest speech overnight was from the likely heir to the ECB, Bundesbank President Weidmann who said a clear endpoint to bond buying is necessary and that the output gap for the Eurozone is filled by 2018. He highlights the risk of being too bearish the EUR at the lower end of the range.

However, today isn’t about the rest of the world but the U.S. as the earnings and the tax reform hopes have combined with good economic data this week to drive up rates and leave the USD finally breaking out of its downtrend. The U.S. dollar is getting support beyond rates today and that matters for other markets as well as the stronger USD means pain in commodities, some emerging markets and potentially squeezes other bond markets as well – witness 10Y China over 3.80%. While the next big hurdle for the USD is 95.50 the key is closing over 94.02 – the 100-day.